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A stochastic dominance analysis of yen carry trades

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  • Fong, Wai Mun
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    Abstract

    Yen carry trades have made headline news for over a decade. We examine the profitability of such trades for the period 2001-2009. Yen carry trades generated high mean returns and Sharpe ratios prior to the recent financial crisis. They continued to outperform major stock markets for the full sample period. Given the non-normality of carry trade returns, we apply non-parametric tests based on stochastic dominance (SD) to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on US and global stock market indices. We apply a general test for SD developed recently by Linton, Maasoumi and Whang (2005) to six currencies as well as portfolios of these currencies. For a large class of risk-averse investors, profits from yen carry trades cannot be attributed to risks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 6 (June)
    Pages: 1237-1246

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1237-1246

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Stochastic dominance Uncovered interest parity Carry trades;

    References

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    Cited by:
    1. Wagner, Christian, 2009. "Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation," MPRA Paper 21125, University Library of Munich, Germany.
    2. Gino Cenedese & Lucio Sarno & Ilias Tsiakas, 2014. "Foreign Exchange Risk and the Predictability of Carry Trade Returns," Working Paper Series 02_14, The Rimini Centre for Economic Analysis.
    3. Serban, Alina F., 2010. "Combining mean reversion and momentum trading strategies in foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2720-2727, November.

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